“The Bank of England's two core purposes are monetary stability and financial stability. Monetary stability means stable prices - low inflation - and confidence in the currency and financial stability entails detecting and reducing threats to the financial system as a whole” (Source: Bank of England http: //www. bankofengland. co. uk/monetarypolicy/index. htm) Prepare a report explaining in relation to the UK. 1) How the rate of inflation has affected the interest rates over the last five years? The Bank Of England was given the responsibility of managing interest rates, currency exchange rate levels, and also attempting to manage inflation rates during the early 1990s (Bannock, Baxter, & Davis, 2003 p. 21).
At that point, the Bank Of England was not fully independent of interference from the British government when it came to the setting of interest rates, lowering inflation levels, or indeed the management of currency exchange rate levels with other major currencies such as the Euro and the US$. Aside from the British government, membership of the European Union has played a role in the Bank Of England’s decision-making processes in relation to interest rates and currency exchange rate levels in the last five years (www. bankofengland. co. uk/monetarypolicy/index. htm).
At the beginning of the five years period being studied here, it seemed that the Bank Of England had managed to use interest rate levels to maintain low inflation levels, strong economic growth as well as a stable level of currency exchange rate levels (Bannock, Baxter, & Davis, 2003 p. 21). British governments had previously found it very difficult to achieve such economic balances for more than limited short –term periods if at all. British governments had either achieved higher levels of economic growth with increasing levels of inflation, or had controlled the levels of inflation at the cost of lower rates of economic growth.
British governments were frequently tempted to lower interest rates before calling general elections, actions which were taken in order to promote higher levels of unsustainable economic growth and a feeling of improved prosperity for the majority of the electorate to increase their chanced of being re-elected. Ending the politically inspired cycles of boom and bust was one of the principle reasons for the New Labour government giving the Bank of England full autonomy (www. bankofengland. co. uk/monetarypolicy/index. htm).
The Bank of England is no fully independent when it comes to setting interest rates to contain inflationary pressures and maintain the exchange rate stability of sterling in relation to all the major currencies (Bannock, Baxter, & Davis, 2003 p. 21). At the start of the five year period in 2002, the Bank of England and the New Labour government had continued to benefit from the high economic growth levels, declining inflation levels and lower interest rates that had begun under the previous Conservative governments.
That period of economic growth had commenced ironically, enough after the Major government had been forced to withdraw from the ERM when currency speculation forced a drastic devaluation of the GBP (Bannock, Baxter, & Davis, 2003 p. 21). Leaving the ERM meant that both the British government and the Bank of England no longer have to worry about raising interest rates to keep sterling at fixed levels in relation to the Euro (Nicholson, 2002 p. 36). Interest rate levels were low and the Bank of England was able to avoid increasing those base rate levels until 2006 as inflation remained low and within the targets set by the Bank of England’s monetary committees, and the GBP was not at risk of being devalued (www. bankofengland. co. uk/monetarypolicy/index. htm).